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Edited Transcript of KIN earnings conference call or presentation 7-Nov-18 9:30pm GMT

Q3 2018 Kindred Biosciences Inc Earnings Call

BURLINGAME Nov 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Kindred Biosciences Inc earnings conference call or presentation Wednesday, November 7, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Denise M. Bevers

Kindred Biosciences, Inc. - Co-Founder, President, COO & Director

* Richard Chin

Kindred Biosciences, Inc. - Co-Founder, CEO & Director

* Wendy K. Wee

Kindred Biosciences, Inc. - CFO

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Conference Call Participants

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* Andrew Jacob D'Silva

B. Riley FBR, Inc., Research Division - Senior Analyst

* Benjamin Charles Haynor

Alliance Global Partners, Research Division - Analyst

* Brandon Richard Folkes

Cantor Fitzgerald & Co., Research Division - Analyst

* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* David Michael Westenberg

CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst

* Swayampakula Ramakanth

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

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Presentation

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Operator [1]

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Welcome to the Third Quarter 2018 Financial Results Conference Call and Webcast for Kindred Biosciences. (Operator Instructions) Please note that the remarks today will include forward-looking statements and that actual results could differ materially from those projected or implied in our forward-looking statements. For a description of important factors that could cause actual results to differ, we refer you to the forward-looking statements in today's press release and the note on forward-looking statements in the company's SEC filings.

It is now my pleasure to turn the call over to KindredBio's CEO, Richard Chin. Dr. Chin, please proceed.

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [2]

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Thank you, operator. Good afternoon, and welcome to our third quarter 2018 financial results call. Joining me today from the management team of KindredBio are Denise Bevers, our President and COO; Wendy Wee, our CFO; and Katja Buhrer, our VP of Corporate Development and Investor Relations.

I'm pleased to announce that we had a very successful third quarter. Our Q3 Mirataz revenues are well within expectations. We announced positive results from our IL-32 antibody study and our other programs are on track. Furthermore, there is momentum building in the veterinary space as more investors recognize the attractiveness of the pet market.

As Denise will discuss in detail, we are pleased with the Q3 sales. I will caution that we are still in the early stages of the launch and it's too early to draw conclusions, but we believe that Mirataz is on its way to being a successful drug. We based that on a number of things, including initial penetration, orders from clinics, and reorders from distributors.

We further believe that Mirataz has additional upside, including label expansions, and have initiated work towards that. And we have additional life cycle management plans for this promising molecule.

On Zimeta, we have been informed that the FDA will be re-inspecting our API contract manufacturer. Because there is no fixed timeline for this inspection, we announce expect approval in 2019.

Turning to dermatitis, we announced the impressive results from our pilot study on canine atopic dermatitis. Atopic dermatitis and associated indications like allergic dermatitis and itching are key areas for us. So I'd like to highlight some of our assumptions and strategies.

First, we believe that we are only at the beginning of the evolution of this market. There is still an enormous amount of unmet medical need. We believe that the current sales may only represent the tip of the iceberg. The market is not fully penetrated yet by any means and let's keep in mind that atopic dermatitis is only a subset of diseases and conditions that can cause itching in dogs.

I should also note that the feline market is very attractive as well. Second, for the reasons we outlined on the last call, namely the more generally favorable safety benefit profile and the economic alignment with the veterinarians, we believe that dermatitis and itching markets will be dominated by biologics and that veterinarians will be mixing and matching biologics to optimize therapeutics for individual animals. We believe the sector could perhaps even grow to rival the flea and tick market, although that remains to be seen but certainly, the potential is there.

Third, KindredBio is particularly well positioned in the field. Developing biologics is difficult. Approaching engineering is difficult, high tighter cell line development is difficult, and right now, finding manufacturing spots is extraordinarily difficult and expensive. We believe we have one of the broadest, if not the broadest pipeline of dermatitis candidates. IL-31 antibody is only the first. Beyond that, we have the IL-4/13 SINK molecule, IL-17 antibody, and multiple other candidates. So we believe we can become a leader in this attractive market.

In the technologically challenging area of biologics, we have one of the most experienced teams in the pharmaceutical industry. These experts are responsible for some of the most successful human drugs approved and are using cutting edge technologies to develop therapies for pets. We believe it will be very difficult for most of our competitors to catch up.

KindredBio is one of the only companies in the companion animal sector and one of a small handful of human companies with nearly end-to-end capabilities in biologics. This provides a very substantial competitive advantage given the importance of speed, cost of development, and cost of goods.

We believe our capabilities exceeds even some of the very largest biologics CMOs. But beyond atopic dermatitis, we see multiple other markets that may be comparable in size. The companion animal sector has been evolving rapidly and we think we will see many other products that approach human product like revenues.

So as I said before, we believe we're going to see multiple products in the industry that sell in the several hundred million dollar range, especially biologics, across multiple diseases.

We said when we started the company that we expect our molecules to sell between $10 million to $100 million per year. We are now revising that to $10 million to several hundred million dollars per year. And don't forget, our average cost to develop our drugs is only $5 million to $8 million. Our goal is to have multiple best-in-class molecules in the biologics field, and we believe we're strongly positioned to be the leader in companion animal biologics.

Given our success with Mirataz, we believe we have validated our business model and we're very excited to continue our success with the other products. Thank you.

I will now turn the call over to Denise.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [3]

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Thank you, Richard. I will start with an update on the launch of Mirataz, followed by an overview of key pipeline candidates and our commercial manufacturing.

As our first FDA approved product, and the first and only transdermal ointment to manage feline weight loss in cats, Mirataz is a historic product for KindredBio as well as for the companion animal sector. In its first quarter on the market, I'm pleased to report a high level of customer awareness and acceptance with all indicators pointing toward a successful launch.

After receiving approval in early May, we were able to bring Mirataz to market quickly with our first shipment to distributors on July 9. While the launch remains in its infancy and the results to date are based on a partial quarter, I'm pleased to say that Mirataz' third quarter sales are well within our expectations. Already, approximately half of the U.S. veterinarians are aware of Mirataz and nearly 1 in 4 of the 25,00 veterinary clinics in the U.S. placed an order during this quarter.

This strong initial clinic uptake is consistent with our pre-approval market research and we believe it underscores the appeal of a safe and effective transdermal medication for the management of unintended feline weight loss.

Based on the rate at which we continue to add new accounts, we expect to achieve our year-end goal of having Mirataz in 1/3 of all U.S. veterinary clinics.

Alongside early clinic penetration, we're likewise encouraged by the rate of reorders, which have allowed us to recognize revenues earlier than expected. The response from customers have been uniformly positive with around 1/3 of the approximately 5,400 clinics that ordered Mirataz reordering in this quarter.

Keeping in mind that initial stocking orders were sent out to distribution partners through mid-August, this is a promising early indicator. As I noted last quarter, we were judicious with our distributors' initial stocking orders, preferring smaller initial orders that accurately reflect underlying customer demand. And I'm pleased to report that all of our national and regional distributor partners have already reordered the product, and we've observed positive move out trends.

We are also actively selling to key corporate accounts, such as VCA and their affiliates, with additional accounts set to come onboard before year-end.

From a commercial standpoint, our strategy has been to keep staffing in lockstep with demand and expand our team of specialists as sales dictate. Based on encouraging initial penetration and reorder rates, we have been expanding our sales force. We currently have 21 sales specialists in the field and expect a total of 25 by year-end. We believe that this expansion of our sales force, paired with the efforts of our more than 800 distributor reps, will continue to increase penetration and sales per clinic.

Consistent with our preapproval research regarding market size, our latest post-launch research confirms that veterinarians see an average of 7 cats per week with unintended weight loss, equating to approximately 9 million cats per year.

So looking ahead, we expect to bring on additional corporate accounts through the end of the year, and ramp up our sales force so that we'll be batting with a full team as we move into the VMX and WVC Conferences in the first quarter of 2019, which together attract over 30,000 attendees.

Because these conferences are where most veterinarians get information about new products, this is when you can really drive adoption. While on the topic of Mirataz, the European approval process is also moving along. We are currently responding to the European Medicine Agency's questions and advancing activities to prepare the market with continued education around Mirataz scheduled for European conferences in 2019.

Now turning to our key pipeline products, let me start with Zimeta IV, our product for the control of fever in horses. As we have previously disclosed, the FDA has approved the safety and effectiveness technical sections for Zimeta IV and indicated that it does not have any additional questions or requests from KindredBio regarding the CMC technical section.

The preapproval inspection at the contract manufacturer of Zimeta IV took place in July and was successful. The responses to the findings identified during an inspection in April at the contract manufacturer of the active pharmaceutical ingredient, or API, dipyrone, have been submitted to FDA. The FDA has indicated it will conduct a re-inspection of the API manufacturer.

The approval timeline is now dependent on FDA's re-inspection and given that review timelines are not fixed, approval will likely be in 2019.

Regarding Zimeta Oral, our proprietary gel that is expected to expand the use and build upon the success of Zimeta IV, we remain in discussions with FDA regarding the data required for submission and we're in the process of transferring the product to the commercial manufacturer.

As Richard mentioned, last week, we achieved a major milestone for our biologics pipeline. On Tuesday, October 30, we announced positive results from our pilot effectiveness study of our IL-31 antibody for the treatment of atopic dermatitis in dogs. I won't go into too much detail on the results of the IL-31 pilot effectiveness study, which will be discussed in detail on the call during the day of the announcement. But to recap the key findings, our IL-31 antibody resulted in statistically significant reduction insurance pruritus across all does groups and was sustained for 6 to 8 weeks with a clear dose response.

The reduction in itching score was as high as 86.1%. Based on these positive results, we have commenced a pilot field study for our IL-31 antibody and assuming this is positive, we will move into a pivotal study next year. We are also in the process of initiating pilot effectiveness studies for several other molecules for atopic dermatitis, including a caninized anti-IL17 antibody and a canine anti-IL4/IL13 SINK molecule.

Another promising biologic candidate for which we plan to report data in the near term is our enhanced version of epoCat for the control of non-regenerative anemia in cats. I'm pleased to report that the pilot field effectiveness study is nearly completed with topline data expected in the first quarter of next year.

We are also in discussions with FDA regarding the pivotal study design assuming the pilot data are positive. Given that half of the elderly cats develop kidney disease, which can cause anemia, epoCat is another biologic candidate that has the potential to address a large market opportunity.

Our enhanced version of epoCat has been especially engineered with a prolonged half-life compared to endogenous feline erythropoietin and the TK data suggests the molecule may have sufficiently long half-life to allow for once monthly dosing.

As reported, the pilot field efficacy study of our anti-TNF monoclonal antibody targeting sick or septic foals has been completed with positive results. We are now in discussions with FDA regarding the pivotal study design. Sepsis in foals can cause up to 50% mortality and is an important unmet medical need with no FDA approved therapy. We have optimized an anti-equine anti-TNF monoclonal antibody and intend to continue field studies during the 2019 foaling season following discussions with FDA regarding the development plan.

The pilot field efficacy study of our anti-TNF antibody for canine inflammatory bowel disease has been initiated and is currently enrolling. We believe that IBD in dogs could be a very attractive market.

As we've discussed in the past, access to manufacturing and cost of goods are paramount when it comes to biologics. As such, we believe the state of the art 180,000 square foot manufacturing plant we are building in Kansas to support our biologics pipeline represents a key competitive advantage. Construction on the manufacturing lines is progressing on time and on budget, and we continue to expect the first phase, which will support our initial product lines, to be completed by mid-2019.

So to recap, this was a milestone quarter for KindredBio, marked by the launch of our first product and transition to a commercial stage company. I'm so pleased with the initial results from the rollout of Mirataz and remain confident of the product's long-term potential.

At the same time, we continue to make progress across our deep pipeline and are encouraged by the results of our IL-31 pilot study, which validates our position as leader in companion animal biologics.

With that, I will now turn the call over to Wendy to provide an update on our third quarter 2018 financials.

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [4]

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Thank you, Denise. I would like to reiterate that we are very pleased to be reporting our first quarter of revenues. We are encouraged by the initial enthusiasm for Mirataz and believe that product revenues will be a meaningful contributor to our cash position over time.

For the quarter ended September 30, 2018, KindredBio reported a net loss of $13 million or $0.39 per share as compared to a net loss of $7.9 million or $0.29 per share for the same period in 2017.

For the 9 months ended September 30, net loss was $34.2 million or $1.14 per share as compared to a net loss of $21.1 million or $0.88 per share for the year ago period.

In the third quarter of 2018, we recognized $0.6 million in net product revenues for Mirataz. Mirataz is commercially available to U.S. veterinarians through our network of 3 national and 4 regional distributors, 2 home delivery partners as well as through our direct sales organization.

Approximately 35% of revenues were initial stocking orders from distributors building that inventory and all non-home delivery distributors placed reorders by the quarter end.

In the coming quarters, we expect frequency and duration of therapy to increase as veterinarians become increasingly comfortable with the use of Mirataz and the therapeutic establishes itself in clinical practice.

The cost of product revenues totals $0.1 million in the third quarter, resulting in a gross margin of 83%. Total research and development expenses for the 3 and 9 month periods were $7.5 million and $18.6 million respectively, compared to $4.9 million and $12.5 million for the same periods in 2017.

Stock-based compensation expense included in R&D expense was $0.4 million and $1.3 million for the 3- and 9-month periods ended September 30, which is in line with the year ago periods.

The increase in year to date R&D expenses was due to higher field trial and material costs, including formulation development costs associated with the advancement of our pipeline as well as consulting and other operating expenses.

Selling, general, and administrative expenses totaled $6.6 million and $17.3 million for the 3 and 9-month periods compared to $3.3 million and $9.2 million for the same periods in 2017. The increase in 2018 SG&A was due to higher headcount and related expenses as we transitioned to a commercial stage company as well as higher stock-based compensation expense and other corporate expenses.

Stock-based compensation expense included in SG&A expense was $1.2 million and $3.3 million for the 3 and 9 month periods as compared to $0.9 million and $2.6 million for the same periods in 2017.

As of September 30, KindredBio had $91.6 million in cash, cash equivalents, and investments compared to $82.5 million as of December 31, 2017. Net cash used in operating activities for the first 9 months of 2018 was approximately $32.2 million, offset by a total of $49.2 million of net cash proceeds from an underwritten public offering of our common stock and at the market equity-offering program. We also invested approximately $8.5 million in capital expenditures for the buildout of our Elwood, Kansas manufacturing facility.

For the 2018 calendar year, we expect operating expenses to be closer to $48 million, excluding the impact of stock-based compensation expense and the impact of acquisitions, if any. We are scaling up the commercial team and continuing to focus on the development of our core pipeline candidates and programs.

Additionally, we plan to invest $14 million to $16 million in capital expenditures on the construction and buildout of our Elwood, Kansas facility for our biologics programs, of which $10 million to $12 million is expected in 2018 with the balance in 2019.

In closing, we are pleased with the initial results from the launch of Mirataz and our transition to a commercial stage company is complemented by advances across our robust pipeline.

With an efficient drug development model, industry leading biologics pipeline, and expansive lead over our competition, we expect to be at the forefront of the continued expansion of the companion animal sector. We look forward to updating you on our progress next quarter.

With that, I will turn the call back over to Richard.

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [5]

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Thank you, Wendy. Operator, we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brandon Folkes with Cantor Fitzgerald.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [2]

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Firstly, on the gross margin, it looked very impressive in the quarter. Could you perhaps just give us some color around anything there or is that what the long-term Mirataz gross margin is expected to be? Then secondly, could you provide any color on the reorders post-the end of the quarter? And any color in terms of how much inventory is sitting at the wholesalers? And I've got 2 follow-ups but I'll wait and follow them up after that. Thank you.

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [3]

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Our cost of product revenues consist of product cost, some 3PL costs, and also some purchase price variances. We do expect margins to be around the 80 percentage going forward.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [4]

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And then Brandon, on the question about reorders, so we have been pleased that we're seeing reorders continue. We're seeing upsizes of orders within the same clinic so that's terrific. And with our small and mighty sales team, we've been really focused in that area as well. And one of the things, and I've said this a number of times, but we were tremendously judicious on our initial stocking orders and that was on purpose because we wanted to see real world usage patterns. So we're very much able to manage inventory at the distributors and I can say they are not sitting on a lot of product at any given time.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [5]

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So then secondly, you mentioned potential label expansion. I guess you're probably not in a position to talk about exactly what that may be, but could you help us to think about the magnitude of the opportunity that that could open up? And then lastly, I heard you mention acquisitions, if any. So could you perhaps just give us your thoughts on where you are with business development? I know you've got quite a deep pipeline so I just thought that was an interesting comment.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [6]

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So for the label expansion, obviously, we targeted the indication that we were most attractive to when we looked at Mirataz but we do have some Phase 4 initiatives in place and we're pretty excited about those. It's hard to say how much the label expansion will impact sales, but obviously, we hope. We think some of the indications that we're looking at are pretty interesting.

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [7]

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And on the acquisitions, we continue to have discussions with potential acquisition targets as well as products and we are not at a point where we would be divulging any imminent acquisitions. But I will say that we have identified some attractive potential opportunities.

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Operator [8]

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Our next question comes from David Westenberg with CL King.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [9]

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So I was really impressed that you already saw $600,000 in revenue. So would you be able to give any granularity on sort of as a composition of that sales whether they were maybe just distributor driven or if they were sales force driven?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [10]

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Sure. So our sales force is obviously relatively small compared to distribution. I will say our field sales force and our distributor reps work very closely, but largely, I think what we really wanted distribution to focus on was penetration and outreach to initial clinics. So a lot of that is those first orders and then obviously, we're very much targeting the reorders. And I should mention, we have some very sophisticated analytics internally. So not only are we looking at weekly sales data, we are really slicing and dicing so we can pivot in a nimble way and use our team in the most effective way possible.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [11]

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That was a great way to answer that without revealing too much in terms of...

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [12]

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Dave, we've been practicing.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [13]

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In terms of, I'm sure you don't want to give anything too competitive here, but in terms of could you give any color on potential label differentiation on IL-31? If you can't, can you maybe answer if Zoetis tries to match your label, do you think they would be able to?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [14]

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So I think given that we don't have any head-to-head data, it's probably premature to make any comparisons between the 2. I will say that we think there's a lot of room for multiple products in this category and even within the sub-category of IL-31 antibodies. So I would defer on that action until we have a little more data.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [15]

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And then just finally, Zoetis does have pretty good biological production scale. You invested in the Kansas facility. If there was any sort of pricing-to-pricing match or they did try to get out kind of gross margin you, what's your ability to scale or match them? And then is there an opportunity to maybe partner and produce other biologics for other companies so you would have scale that would resemble a Zoetis?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [16]

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So what we've said is very few companies in veterinary sector can match our capabilities. I think Zoetis is one of the ones that can and I don't think we want to [again] orders for anyone else, lead with our price. Our goal is to develop differentiated products that deliver better product profiles, not to compete on price. Having said that, I don't think anybody can undercut us, and I'm including Zoetis on that, if it comes to competing on price.

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Operator [17]

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Our next question comes from Ben Haynor with Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [18]

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First off, for me, I'll kind of focus on the pipeline. On KIND-014 for EGUS, does that molecule alter the pH of the stomach at all? I know that omeprazole can lead to a more acidic hindgut and cause colonic ulcers. Is that a potential issue with yours or is that something that could be differentiated from Gastrogard or Ulcergard?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [19]

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I think at this point, we don't want to discuss that aspect of that molecule.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [20]

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But you're good, Ben. That was a heck of a way to ask a question.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [21]

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I thought I'd try anyway. So maybe stepping back a little bit then. Just with where you're at in terms of having either already completed pilot field efficacy studies or having ongoing field efficacy studies pilots going on. I mean should we think about the next data being out being kind of epoCat? Are you going to release data on KIND-014 before moving into a pivotal? And then also the same question on anti-TNF?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [22]

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Sure. So yes, epoCat we will be releasing data on that, and you can look forward to that in the first quarter. For KIND-014, we intend to be moving into pivotal in 2019. So we will see if there's any pilot work we need to do before that, that would be of the caliber to release. We would certainly release that. And then for IBD, yes, and I think that's one of the exciting things about this pipeline is you can anticipate seeing a lot of pilot data and catalysts along the way. But we're really excited about these biologics pilot studies.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [23]

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You've talked about in the past having some compounds that aren't disclosed. Are there any pilots ongoing with those compounds that we might see data on in the coming year 2019?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [24]

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There very well could be.

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [25]

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We talked about the small molecule compounds, right.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [26]

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Or biologics that you haven't disclosed. Listen to those as well.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [27]

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Yes, I would say 2019, you'll likely be hearing about something you haven't heard about before at some point.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [28]

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Then lastly for me, I guess having your conference call last week on the IL-31 data, which was awfully amazing, at least in my opinion, have you had a lot of incoming interest for potential out-license partners or firms that you could go to there? And how much as your ask gone up? I would think it would be dramatically in terms of upfront and potential royalties. Do you have any color there?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [29]

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So if we were to do a deal, yes, the upfront, we would expect an upfront that's substantially higher than what we would have wanted before the pilot data. And I don't want to get into too much details. But yes, we have had inbound inquiries on the molecule.

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Operator [30]

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Our next question comes from Andrew D'Silva with B. Riley FBR.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [31]

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Most of my questions have been answered but I've got a couple of quick ones. So as it relates to your gross margin, could you just let me know if you have any sort of a product return liability included in there or anything of that nature that might be a variable that we need to be thinking about?

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [32]

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Yes, we do. We have 2% returns reserve, which is netted into gross revenue. So net revenue is the number that we presented, which is $640 million. I wish it was $640 million but it's $640,000.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [33]

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I've got to update my models. Sorry to get a little bit granular here, but could you explain to me for the 5,500 clinics placing orders and then 1/3 placing reorders. I'm just trying to understand how the first-time revenue recognition worked in this kind of partial quarter. Were those 1/3 placing reorders what was the 640 1-day million dollar revenue line item in the quarter?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [34]

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Of the actual orders, the reorders were on distribution. So go ahead.

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [35]

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Right. So like I said in the call that all the non-home delivery distributors reordered. So that's the reason why we are able to recognize revenue.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [36]

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So I guess asking that another way, was there - when you recognize revenue is it when you actually ship the product out your door to the distributors or is it at the moment they place a reorder?

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [37]

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Well, the moment they place a reorder. So our revenue is based on our shipments to the distributors. And if they did not place a reorder, we will probably defer that to Q4. But because all the non-home delivery distributors placed reorders, we…

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [38]

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Right, and sales into the clinics drive that. I mean that drives the reorders obviously from distribution. So as I've said, we've been happy with our move out rate from distribution.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [39]

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I don't know if this is a question that you have in front of you or not, but do you have a rough idea of what the sales figure would have been assuming that everything you actually shipped during the quarter would have been recognized as revenue? Is that something you can back of the envelope?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [40]

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I think a point of confusion here is the 1/3 reorder, that is by the clinics to the distributors. So essentially, all the distributors did put in a reorder. So we recognize, correct me if I'm wrong, but…

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [41]

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Everything but home delivery.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [42]

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Got it. Now I understand. That makes sense. And then previously in past calls, you've discussed every year or so we should expect the 1 to 2 new products hitting the market and getting approval. Do you have any idea of what the next couple products we should be thinking about should be in perhaps '19 and '20? And then with the IL-31, obviously, it's very early to give an exact date, but is there a timeline to get through the regulatory approval process that if you didn't get through it in a certain amount of time, it would be disappointing, whether it be 3, 4 years or less?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [43]

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Okay, let me take the second question first. We have not put out a timeline. What we have said is that it takes us up to 6 years to develop a product and we are probably a little more than halfway through that on IL-31. We are in discussions with the USDA and once we have some clarity on how quickly they will process the master seed and some of the other things, we'll be in a better position to give guidance on the time line. With regard to the approvals and launches, we expect in the near future to have Zimeta IV, Zimeta oral, Mirataz EU at a minimum and then we are working on some of the other products as well.

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Operator [44]

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Our next question comes from Brooks O'Neil with Lake Street Capital.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [45]

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I wanted to start at a somewhat more basic level and Denise, just ask you for any feedback you've been collecting as it relates to some of the key characteristics of Mirataz. So for example, what are you hearing about the price point, about the method of application of the drug? Any side effects? And perhaps interestingly how it might compare with the alternatives that have been out there historically.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [46]

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Sure. So I think you have to take it with a grain of salt that we tend to hear a lot of the cherry picked positives. So we have heard that veterinarians are really pleased with the application especially because owners really like it and compliance is so important. Don't forget, you have these cats who are typically not eating or having unintended weight loss. So delivery is really important to them. And from a price point perspective, we took some really painstaking effort to decide what price we would have our initial launch price would be. And what we wanted to do was make sure that knowing these are sick cats that price would not be a barrier to using the product. And for that, I think we've garnered a lot of application from the veterinarians. Because they can add that into their treatment for the cat without much pushback. So that's been a positive. As far as side effects, I'm not aware of anything unusual at all, anything certainly beyond the label or unexpected. So nothing in that regard. And then we haven't really heard anything compared to other products because we're the only FDA approved product for weight loss in cats. So other products may be used off-label but we're the only thing approved for cats.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [47]

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In that regard, I was just kind of curious. My sense is there is a pretty well-established usage pattern for mirtazapine off-label and I was just curious what you hear from people. Is your just far superior or are they -- are you hearing from some people they're inclined to kind of continue to use off-label as they have historically?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [48]

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I see what you're saying. Definitely there is -- for those who have tried the transdermal, they certainly prefer that to cutting up a pill and pilling the cat. There's no question about that that we've heard nothing but positive as far as that is concerned. There are certainly some cases where that works for them and the veterinarian may decide not to change something or they may feel like change may be too much for the owner. So while we've had great conversion, there's certainly some that will stick with the tried and true and what they've been using, particularly in a chronic situation.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [49]

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And then Richard, you were just speaking about some of the development stages for atopic dermatitis, IL-31. And I know the timetable is uncertain but what would a normal sequence of events would be for the development of a biologic candidate like you have as it relates to what are the things, let's just say boxes you need to check to get to an approval from the FDA? And in general, what would expect the timetable to look like?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [50]

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Sure. So this is a USDA product. So let me talk about the USDA process first. The 2 components that drive the process are manufacturing and the clinical part. So on the manufacturing part, what you have to do is you have to set up what's called a master seed, which is where all of your batches will be made -- that's the source of all of your batches. And then you have to get it approved by the USDA before you can actually make the batches you use for your clinical study. And that can take a while. That's often on the critical path and it's technically fairly challenging but we are able to do it internally, which not every company can do. The other part is the clinical part. For the USDA, generally, you need an efficacy study, which tends to be smaller than the efficacy studies for the FDA. And then you need a field safety study, which tends to be a couple of hundred animals. So let's see, those are the steps required for USDA. For FDA, the 2 main components are once again manufacturing and clinical. There's a third part, which is a target animal safety study, which is similar to a toxicology study. There, the FDA doesn't have to approve your master cell bank, which is the equivalent of a master seed. So we can save a little bit of time on that. However, the manufacturing requirements, the CGMP requirements are higher. So that can take a little bit longer on the FDA side. On the clinical side, you generally combine the safety and efficacy into one study. It's called an efficacy study, which is a couple hundred patients. So in broad terms, those are the things that are required for the 2 regulatory agencies.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [51]

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That's very helpful. And then just as you talked about the manufacturing, are you thinking about the ability to manufacture these products in your Kansas facility, or in San Francisco, or with some outsourced manufacturer?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [52]

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So while we outsource the small molecule manufacturing, because there are a lot of contract manufacturers who can do it at a low price at high quality, we are planning on keeping all of the biologics manufacturing in-house because number 1, it's quite difficult to do and right now, there are no contract manufacturers capable of manufacturing veterinary biologics. And two, for biologics, cost of goods is very, very important because the margins can be narrower. And we believe we can manufacture at a lower price point than we could by outsourcing or anybody else could do by outsourcing. So most of the antibodies will be commercialized out of the Kansas plant because the volumes we expect to be fairly high. For products that require smaller volumes, epoCat, for example, where the doses are much smaller, we plan to manufacture out of our San Francisco facility.

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Operator [53]

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Our next question comes from Swayampakula Ramakanth with H.C. Wainwright.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [54]

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Most of my questions have been answered but a couple things that I will try and see if you would answer if I ask it this way. You said on the call that 50% of vets have been aware of the products, about 25% have ordered so far at least once. So in your analytics and your talking with your sales force, could you come up with anything what is required for the other 25% who have been aware of but have not ordered. What is it that they're missing to do the script?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [55]

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That's a good question as far as the awareness is certainly different than the penetration. So we're hoping that because there is such significant awareness that we will be able to get the penetration. And one thing that's important to note, with veterinary launches, they're very different than on the human side. So on the human side, obviously, you've got formulary. You've got these sort of switches that flip whereas for veterinary, it's clinic by clinic. So it's really a penetration.

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [56]

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And I would add, they may be aware of it but they may not be aware of the safety efficacy profile, the benefits. So there's a step between awareness, and intent to prescribe, and prescription itself.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [57]

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And we're seeing penetration increase. We're anticipating that 1/3 of all veterinary clinics will be penetrated by the end of the year.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [58]

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I'm not sure whether this question has been asked in some form, but given that $640,000 revenue that you recognized this quarter, I also remember you saying you would not recognize as a revenue until there is at least a reorder element. So within that $640,000, how many of those are unique and single reorders or multiple reorders? I'm just trying to figure out what percentage of folks are coming back again and again? Is there any granularity on that, that you can provide?

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [59]

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So we probably won't provide much detail on that at this point. But yes, a lot of it was obviously initial orders because this was the first partial quarter and every -- all distributors came on at a different time point. So a lot of it was initial orders. And then the reorders were typically 1 or 2 reorders per clinic depending so -- and by distributor.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [60]

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Then one last question on Mirataz. The [cost] was 83% for this quarter. Is that -- can you improve on that or is that something that we should think would be what you could achieve from this product?

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Wendy K. Wee, Kindred Biosciences, Inc. - CFO [61]

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Well, we expect the margins to be consistent in the low 80s.

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Denise M. Bevers, Kindred Biosciences, Inc. - Co-Founder, President, COO & Director [62]

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We worked really hard leading up to it with our manufacturing to get those really attractive margins. So it's pretty well baked in and we're really pleased.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [63]

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And then on Zimeta IV, outside of that re-inspection that needs to be done, is there any additional requirements to be completed before FDA approval? Or is that the one last thing left before the FDA can make a decision?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [64]

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Everything else is done. That's the only thing we're waiting on.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [65]

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So this is just a strategy, high-level kind of a question. So Richard, you were saying in your opening remarks that Kindred is one of the companies that has a biological R&D and a manufacturing front such that you're completely integrated 2-on-2. Is that strength playing in any of your [canonization] especially incoming BD inquiries, either to get a molecule into your hands so that you run the whole thing for them, or where they want to utilize some of your facilities on a core development kind of a situation?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [66]

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Is the question around -- I think I missed part of the question. Is the question around how we might work with potential partners?

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [67]

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How you might or what kind of inquiries are you getting that makes you believe that your ballast for strength is much better than what's out there?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [68]

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I see. Yes, absolutely. So we have had discussions on IL-31 previously, mainly because other people are coming to us at a very early stage when it became apparent that the atopic dermatitis market was going to be quite large. And given that essentially every other company, virtually every other company wanted to license that molecule, we drew the conclusion that nobody else that we know of has an anti-IL31 antibody out there why they wouldn't want to license it. And we were discussing the term. It was clear that even if we out-licensed it that we would have to continue to do all the work because none of the potential partners have the ability to take over any part of the value chain and the development. So that's the basis for believing that we are quite a bit ahead of potential competitors.

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Operator [69]

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(Operator Instructions) Our next question, we have a follow-up from Ben Haynor with Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [70]

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Just real quickly, I think you said that you were looking at atopic dermatitis in cats as well. I was just wondering if you had done similar work in felinizing of the molecules there and I assume if you do decide to go down that path that you would seek to fully felinize them like you have done in the canines. Is that correct?

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [71]

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So what I said is the feline atopic dermatitis market is quite attractive. I didn't quite say we had a molecule, but if we did, it would be fully felinized, and it would be high affinity. And we certainly have the capability to do that. So I think at this point that's all I want to say.

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Operator [72]

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Ladies and gentlemen, this now concludes our Q&A portion of today's conference. I would now like to turn the call back to Dr. Chin.

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Richard Chin, Kindred Biosciences, Inc. - Co-Founder, CEO & Director [73]

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Thank you, operator. I want to thank our shareholders for your support as we continue on this very exciting journey. Thank you.

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Operator [74]

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Ladies and gentlemen, thank you for attending today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.